sufficiently high after the 2005 and 2009 crashes to drive emissions reduction. Literature suggests that they have not been high enough to drive renewable energy investment in the absence of feed-in tariffs (Blanco and Rodrigues, 2008). Engels et al. (2008) surveyed companies covered by the EU ETS and found widespread evidence of irrational behavior, i. e., companies not mitigating even if costs were substan-tially below allowance prices. Engels (2009) even finds that many com-panies did not know their abatement costs. A barrier to participation in trading could have been the highly scale-specific transaction costs, which were estimated to reach over 2 EUR / EUA for small companies in Ireland (Jaraitė et al., 2010). Given that 75 % of installations were responsible for just 5 % of emissions in 2005 – 2006 (Kettner et al., 2008), this is a relevant barrier to market participation. Another way of mobilizing cheap options is increasing the reach of the EU ETS, either through linking to other trading schemes or by allowing import of off-set credits. Anger et al. (2009) find that linking can substantially reduce compliance cost, especially if the allocation is done in an efficient way that does not advantage energy-intensive industries. Linking to the states of the European Economic Area and Switzerland has not been researched to a large extent, with the exception of Schäfer (2009), who shows how opposition of domestic interest groups in Switzerland and lacking flexibility of the EU prevented linking. Access to credits from the project-based mechanisms was principally allowed by the ‘Link-ing Directive’ agreed in 2004. In 2005 – 2007, companies covered by the EU ETS could import credits from the mechanisms without limit, but access to the mechanisms has been reduced over time, e. g., by national level limitations in the 2008 – 2012 period and a central lim-itation for 2013 – 2020. The import option was crucial for the devel-opment of the CDM market (Wettestad, 2009) and drove CER prices.
Skjærseth and Wettestad (2008), Chevallier (2010) and Nazifi (2010) discuss the exchange between the member states and the EU Commis-sion about import thresholds for the 2008 – 2012 period.
Distributional and broader social impacts of the EU ETS have not been assessed by the literature to date except for impacts on specific indus-trial sectors. While the majority of allowances for the electricity sector are now sold through auctions, other industries receive free allocations according to a system of 52 benchmarks. Competitiveness impacts of the EU ETS have been analyzed intensively. Demailly and Quirion (2008) find that auctioning of 50 % of allocations would only lead to a 3 % loss in profitability of the steel sector, while in their analysis for the cement sector Demailly and Quirion (2006) see a stronger expo-sure with significant production losses at 50 % auctioning. Grubb and Neuhoff (2006) and Hepburn et al. (2006) extended this analysis to other sectors and concluded that higher shares of auctioning are not jeopardizing competitiveness.
Summing up the experiences from the EU ETS, institutional feasibility was achieved by a structurally lenient allocation, which puts into doubt its environmental effectiveness. There was a centralization of allocation over time, taking competences away from national governments. Sev-eral factors have pushed the carbon prices down in the second phase of the EU ETS. This has created a situation in which the target set by
Euro-pean policy makers is achieved, but carbon prices are low; while there are efforts to stabilize the carbon price through backloading or an ambi-tious emission target for 2030, at the time of this writing it has proven politically difficult to reach agreement on these matters. Future reform of the EU ETS will need to clarify the objectives of the scheme, i. e., a quantitative emissions target or a strong carbon price (e. g., to stimulate development of mitigation technologies). The link to the project-based mechanisms was important to achieve cost-effectiveness, but this has been eroded over time due to increasingly stringent import limits.
14�4�2�2 Regional cooperation on energy
Given the centrality of the energy sector for mitigation, regional coop-eration in the energy sector could be of particular relevance. Regional cooperation on renewable energy sources (RES) and energy efficiency (EE) typically emerges from more general regional and / or interre-gional agreements for cooperation at economic, policy, and legisla-tive levels. It also arises through initialegisla-tives to share available energy resources and to develop cross-border infrastructure. Regional coop-eration mechanisms on energy take different forms depending, among others, on the degree of political cohesion in the region, the energy resources available, the strength of economic ties between participat-ing countries, their institutional and technical capacity, and the finan-cial resources that can be devoted to cooperation efforts.
In this context, it is also important to consider spillovers on energy that may appear due to trade. As discussed in Chapter 6 (Section 6.6.2.2), mitigating climate change would likely lead to lower import depen-dence for energy importers (Shukla and Dhar, 2011; Criqui and Mima, 2012). The flip side of this trend is that energy-exporting countries could lose out on significant energy-export revenues as the demand for and prices of fossil fuels drops.3 The effect on coal exporters is very likely to be negative in the short- and long-term as mitigation action would reduce the attractiveness of coal and reduce the coal wealth of exporters (Bauer et al., 2013a; b; Cherp et al., 2013; Jewell et al., 2013).
Gas exporters could win out in the medium term as coal is replaced by gas. The impact on oil is more uncertain. The effect of climate poli-cies on oil wealth and export revenues is found to be negative in most studies (IEA, 2009; Haurie and Vielle, 2011; Bauer et al., 2013a; b;
McCollum et al., 2014; Tavoni et al., 2014). However, some studies find that climate policies would increase oil export revenues of mainstream exporters by pricing carbon-intensive unconventionals out of the mar-ket (Persson et al., 2007; Johansson et al., 2009; Nemet and Brandt, 2012). See also Section 6.3.6.6.
In the following section, some examples of regional cooperation will be briefly examined, namely the implementation of directives on renew-able energy resources in the EU (European Commission, 2001, 2003, 2009b) and in South East Europe under the Energy Community Treaty
3 See also Section 13.4 on burden sharing regimes that could be used to offset the possible decrease in export revenue for fossil exporters.
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(Energy Community, 2005, 2008 and 2010), and energy resource sharing through regional power pools and regional cooperation on hydropower.
Regional cooperation on renewable energy in the European Union
The legislative and regulatory framework for renewable energy in the EU has been set up through several directives of the European Com-mission adopted by EU member states and the European parliament (European Commission, 2001, 2003, 2009b). These directives are an example of a regulatory instrument, in contrast to the cap-and-trade mechanism of the EU ETS described above. In the past, the European Community adopted two directives on the promotion of electricity from renewable sources and on the promotion of biofuels (European Commission, 2001, 2003). These two EU directives established indica-tive targets for electricity from renewable sources and biofuels and other renewables in transport, respectively, for the year 2010. Further-more, they started a process of legal and regulatory harmonization and required actions by EU member states to improve the develop-ment of renewable energy (Haas et al., 2006, 2011; Harmelink et al., 2006). There was progress toward the targets, but it did not occur at the required pace (Rowlands, 2005; Patlitzianas et al., 2005; European Commission, 2009a; Ragwitz et al., 2012). Therefore, the European Commission proposed a comprehensive legislative and regulatory framework for renewable energy with binding targets.
This led to the introduction of the Directive 2009 / 28 / EC on the promo-tion of RES (European Commission, 2009b). In this directive, EU Mem-ber States agreed to meet binding targets for the share of RES in their gross final energy consumption by the year 2020. The overall target for the European Union is 20 % of EU gross final energy consumption to come from RES by the year 2020. The share of renewables in gross final energy consumption has indeed increased substantially after passage of the directive and stands at around 13 % in 2011.
The RES Directive is part of the EU climate and energy package (European Commission, 2008). As such, it has interactions with the other two pillars, namely the EU ETS and the EE-related directives.
On the basis of model analysis, the European Commission (European Commission, 2011b) estimates that the implementation of the EU RES directive could represent an emissions reduction of between 600 and 900 MtCO2eq by the year 2020 in the EU-27 compared to a baseline scenario (Capros et al., 2010). The introduction of regula-tory instruments targeted at RES and / or EE on top of the EU ETS appears justified on the grounds of the failure of the market to provide incentives for the uptake of these technologies (European Commission, 2013a). Still, the combined emission reductions result-ing from RES deployment and EE measures leave the EU ETS with a reduced portion of the effort necessary to achieve the 20 % EU emis-sion reduction target by 2020 (e. g., European Commisemis-sion, 2013a).
This, as discussed above, has contributed to a reduced carbon price in the EU ETS (Abrell and Weigt, 2008; OECD, 2011a), affecting its strength as a signal for innovation and investments in efficiency and low-carbon technologies (e. g., European Commission, 2013b).
Therefore, coordination between RES and EE policies and the EU ETS is needed and could include introducing adjustment mechanisms into the EU ETS.
The implementation of the EU directives for renewable energy and the achievement of the national targets have required considerable efforts to surmount a number of barriers (Held et al., 2006; Haas et al., 2011;
Patlitzianas and Karagounis, 2011; Arasto et al., 2012). One obstacle is the heterogeneity between EU member states regarding their insti-tutional capacity, know-how, types of national policy instruments and degrees of policy implementation (e. g., European Commission, 2013c). Still, the EU directives for renewable energy have contributed to advancing the introduction of RES in the member states (Cardoso Marques and Fuinhas, 2012). This regional cooperation has taken place in the framework of a well-developed EU integration at the political, legal, policy, economic, and industrial level. Only with these close integration ties has it been possible to implement EU directives on RES.
Power pools for energy resources sharing
Power pools have evolved as a form of regional cooperation in the electricity sector and are an example of an opportunity for mitigation that only arises for geographically close countries. Electricity intercon-nections and common markets in a region primarily serve the purpose of sharing least-cost generation resources and enhancing the reliabil-ity of supply. Getting regional electricreliabil-ity markets to operate effectively supports mitigation programs in the electricity sector. Cross-border transmission systems (interconnectors), regional markets and trade, and system-operating capability play a major role in both the econom-ics and feasibility of intermittent renewables. In some cases, power pools provide opportunities for sharing renewable energy sources, notably hydropower and wind energy, facilitating fuel switching away from fossil fuels (ICA, 2011; Khennas, 2012). In this context, there is a correlation between the development of the power pool and the abil-ity of a region to develop renewable electricabil-ity sources (Cochran et al., 2012). A combination of electricity sector reform, allowing power utili-ties to be properly run and sustainable, and regional wholesale market development, with the corresponding regional grid development, is necessary to tap their potential.
An example of a well-established power pool is the Nord Pool, the common market for electricity in Scandinavia, covering Denmark, Swe-den, Norway, and Finland. The Nordic power system is a mixture of hydro, nuclear, wind, and thermal fossil power. With this mix, the pool possesses sizeable amounts of flexible regulating generation sources, specifically hydropower in Norway. These flexible hydropower plants and pump storage plants allow compensating the inflexibility of wind power generation (e. g., in Denmark), which cannot easily follow load changes. Through the wholesale market, the Nord Pool can absorb and make use of excess wind electricity generation originating in Denmark, through complementary generation sources. This allows the Nord Pool to integrate a larger share of wind energy (e. g., Kopsakangas-Savolainen and Svento, 2013).
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In Africa there are five main power pools, namely the Southern Africa Power Pool (SAPP), the West African Power Pool (WAPP), the East African Power Pool (EAPP), the Central African Power Pool (CAPP), and the Comité Maghrébin de l’Electricité (COMELEC). The SAPP, for example, includes 12 countries: Botswana, Lesotho, Malawi, South Africa, Swaziland, Zambia, Zimbabwe, Namibia, Tanzania, Angola, Mozambique, and Democratic Republic of the Congo. Its generation mix is dominated by coal-based power plants from South Africa, which has vast coal resources and the largest generation capacity within SAPP. Other resources available in the SAPP are hydropower from the northern countries and, to a lower extent, nuclear power, and gas and oil plants (Economic Consulting Associates (ECA), 2009; ICA, 2011).
Overall the scale of trade within these power pools is small, leading to continued inefficiencies in the distribution of electricity genera-tion across the continent (Eberhard et al., 2011). One of the driving forces in SAPP is supplying rapid demand growth in South Africa with hydropower generated in the northern part of the SAPP region. This way, the power pool can contribute to switching from coal to hydro-power (ICA, 2011; IRENA, 2013). African hydro-power pools and related generation and transmission projects are financed through different sources, including member contributions, levies raised on transactions in the pool and donations and grants (Economic Consulting Associ-ates (ECA), 2009). To the extent that financial sources are grants or loans from donor countries or multi-lateral development banks, there
exists the possibility to tie financing to carbon performance standards imposed on electricity generation and transmission infrastructure projects.
Regional gas grids
Regional gas grids offer similar opportunities for mitigation (see Chapter 7). In particular, they allow the replacement of high-carbon coal-fired and diesel generation of electricity by gas-fired plants. Such gas grids are developing in East Asia linking China with gas exporting countries as well as in Eastern Europe, again linking gas exporters in Eastern Europe and Central Asia with consumers in Western Europe with the EU taking a coordinating role (Victor, 2006).
Regional cooperation on hydropower
Regional cooperation on hydropower may enable opportunities for GHG-emissions reduction for geographically close countries by exploit-ing hydropower power potential in one country and exportexploit-ing electric-ity to another, by joint development of a transboundary river system (van Edig et al., 2001; Klaphake and Scheumann, 2006; Wyatt and Baird, 2007; Grumbine et al., 2012), or by technology cooperation and transfer to promote small hydropower (UNIDO, 2010; Kumar et al., 2011; Kaunda et al., 2012). The development of hydropower poten-tial, however, needs to comply with stringent environmental, social and economic sustainability criteria as it has important ramifications
Box 14�1 | Regional cooperation on renewable energy in the Energy Community
The Energy Community extends the EU internal energy market to South East Europe and beyond, based on a legally binding framework. The Energy Community Treaty (EnCT) establishing the Energy Community entered into force on 1 July 2006 (Energy Community, 2005). The Parties to the Treaty are the European Union, and the Contracting Parties Albania, Bosnia and Herzegov-ina, Croatia, Former Yugoslav Republic of Macedonia, Montene-gro, Serbia, the United Nations Interim Administration Mission in Kosovo (UNMIK), Moldova and Ukraine. The Energy Community treaty extended the so-called ‘acquis communautaire’, the body of legislation, legal acts, and court decisions, which constitute European law, to the contracting parties. As a result, contracting parties are obliged to adopt and implement several EU direc-tives in the areas of electricity, gas, environment, competition, renewable energies, and energy efficiency. In the field of renew-able energy, the EU acquis established the adoption of the EU directives on electricity produced from renewable energy sources and on biofuels. As a further step, in 2012, the Energy Community adopted the EU RES Directive 2009 / 28 / EC (Energy Community, 2012). This allows contracting parties to use the cooperation mechanisms (statistical transfers, joint projects, and joint support
schemes) foreseen by the RES directive under the same conditions as the EU member states.
Analyses of the implementation of the acquis on renewables in the energy community (EIHP, 2007, p. 2007; Energy Community, 2008;
IEA, 2008; IPA and EPU-NTUA, 2010) found that progress in imple-menting the EU directives has been dissimilar across Contracting Parties, among others due to the heterogeneity between these countries in institutional capacity, know-how, and pace of imple-mentation of policies and regulatory frameworks (Energy Com-munity, 2010; Mihajlov, 2010; Karakosta et al., 2011; Tešić et al., 2011; Lalic et al., 2011). Still, economic and political ties between South East Europe and the European Union and the prospect of contracting parties to become EU member states have contributed to the harmonization of legal, policy, and regulatory elements for RES (Renner, 2009, p. 20). Through the legally binding Energy Community Treaty, the European Union has exported its legislative frameworks on RES and EE to a neighboring region. Their further implementation, however, requires strengthening national and regional institutional capacity, developing regional energy markets and infrastructure, and securing financing of projects.
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for development and climate change in the affected regions (Kumar et al., 2011). In addition, there are difficult economic, political, and social issues regarding water sharing, upstream and downstream impacts, and other development objectives. Given its vulnerability to droughts and other impacts of climate change, hydropower develop-ment requires careful planning, including provisions for complemen-tary electricity generation sources (Zarsky, 2010; Nyatichi Omambi et al., 2012)
Regional cooperation on energy efficiency standards and labelling
Standards and labels (S&L) for energy-efficient products are useful in accelerating market transformation towards more energy-efficient technologies. Energy-efficiency S&L programs help, for instance, reduc-ing consumption of fossil fuels (e. g., diesel) for electricity generation.
Also, when applied to biomass-based cook stoves, S&L help decreas-ing the use of traditional biomass for cookdecreas-ing (Jetter et al., 2012).
Standards and labelling programs at a regional-scale provide critical mass for the creation of regional markets for energy efficiency and, therefore, incentives to equipment manufacturers. They are also use-ful in reducing non-tariff barriers to trade (NAEWG, 2002). Examples of existing S&L regional programs are the European Energy Label-ling directive, first published as Directive 92 / 75 / EEC by the European Commission in 1992 (European Commission, 1992) and subsequently revised (Directive 2010 / 30 / EU; European Commission, 2010), to monize energy-efficiency S&L throughout EU member states and har-monization efforts on energy-efficiency S&L between the U.S, Canada, and Mexico as a means to reduce barriers to trade within the North American Free Trade Agreement (NAFTA), (NAEWG, 2002; Wiel and McMahon, 2005; Geller, 2006). Currently, several regional S&L initia-tives are being developed, such as the Economic Community of West African States (ECOWAS) regional initiative on energy-efficiency stan-dards and labelling (ECREEE, 2012a), and the Pacific Appliance Label-ling and Standards (PALS) program in Pacific Island Countries (IIEC Asia, 2012).
14�4�2�3 Climate change cooperation under regional